McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Chapter 5

Strategic Capacity Planning for Products and Services

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Introduction

• After selection of a production process, we need to determine capacity.

• Capacity: is the “throughput”, or the number of units a facility can hold, receive, store, or produce in a period of time.

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Introduction

• Capacity determines large portion of the fixed cost.

• Capacity determines if demand will be satisfied or if facilities will be idle.

• If the facility is too large, portion of if will set and add cost to existing production.

• If the facility is too small, customers and perhaps the entire market are lost.

5-4

Capacity Planning

• Capacity– The upper limit or ceiling on the load that an operating

unit can handle– Capacity needs include

• Equipment• Space• Employee skills

5-5

Strategic Capacity Planning

• Goal– To achieve a match between the long-term supply

capabilities of an organization and the predicted level of long-run demand• Overcapacity operating costs that are too high• Undercapacity strained resources and possible loss of

customers

5-6

Capacity Planning Questions

• Key Questions:– What kind of capacity is needed?– How much capacity is needed to match demand?– When is it needed?

• Related Questions:– How much will it cost?– What are the potential benefits and risks?– Are there sustainability issues?– Should capacity be changed all at once, or through several

smaller changes– Can the supply chain handle the necessary changes?

5-7

Capacity Decisions Are Strategic

• Capacity decisions– impact the ability of the organization to meet future demands– affect operating costs– are a major determinant of initial cost– often involve long-term commitment of resources– can affect competitiveness– affect the ease of management– are more important and complex due to globalization– need to be planned for in advance due to their consumption of

financial and other resources

5-8

Capacity

Design capacity– maximum output rate or service capacity an operation, process,

or facility is designed for

Effective capacity– Design capacity minus allowances such as personal time,

maintenance, and scrap

Actual output– rate of output actually achieved--cannot

exceed effective capacity.

5-9

Design and Effective Capacity

• Most organizations operate their facilities at a rate less than the design capacity (about 82% of design capacity).

• It is more efficient to operate when resources are not stretched to the limit.

• This concept is called effective capacity.

5-10

Design and Effective Capacity

• Effective Capacity: is the capacity a firm expects to achieve given the current operating constraints (i.e. can only operate in the morning shift).

• Effective capacity is always lower than design capacity.

5-11

Measuring System Effectiveness

• Actual output– The rate of output actually achieved– It cannot exceed effective capacity

• Efficiency

• Utilization

Measured as percentages

capacity effective

output actualEfficiency

capacitydesign

output actualnUtilizatio

5-12

Example– Efficiency and Utilization

• Design Capacity = 50 trucks per day• Effective Capacity = 40 trucks per day• Actual Output = 36 trucks per day

%9040

36

capacity effective

output actualEfficiency

%7250

36

capacitydesign

output actualnUtilizatio

5-13

Determinants of Effective Capacity

• Facilities• Product and service factors• Process factors• Human factors• Policy factors• Supply chain factors• External factors